Better Stock: Textainer (TGH) vs. Teekay (TK)

Few shipping stocks have enjoyed a recovery quite like the one Textainer (TGH +0.00%) experienced in 2017. Textainer has seen its shares rise by roughly 190% in the past year alone, and the forces driving the stock higher are likely to persist for the foreseeable future, although they're unlikely to extend to the shipping industry as a whole. That means investors will need to evaluate shipping stocks on a case-by-case basis.

Given that, it may make sense to home in on shipping stocks riding green shoots of momentum into 2018, such as oil and gas shipper Teekay (TK +1.33%). Shares of the offshore energy specialist haven't fared too poorly in 2017 compared with other shippers, but the business remains deep in the red. Nonetheless, with global oil and gas prices on the rise, the company's fortunes could change for the better in short order.

There's no denying Textainer has been the better stock in the past 12 months, but could Teekey be a better buy going forward on its potential alone?

Image source: Getty Images.

The matchup

Textainer may not have completely resisted the gravitational pull of misery that has come with the collapse of global shipping rates, but its business, which focuses on leasing shipping containers rather than vessels, is nearing escape velocity. New waterborne paint regulations and a change of seasons in China are combining to provide a powerful tailwind for shipping-container lease prices -- just as a slew of the company's older and lower-priced leases are expiring.

That means the same assets will be rented out at substantially higher rates in the next few years without much additional effort by the company. Incremental revenue and profits alone have the potential to carry the stock through the end of the decade.

On the other hand, Teekay is still working its way back to profitability, although its peers have set the bar so low that Mr. Market has been handsomely rewarding even small wins. The stock erupted at the release of third-quarter 2017 earnings because a pro forma net loss of $0.41 per share beat the expected loss of $0.44.

The "earnings" beat was bolstered by management's relatively optimistic tone on the conference call. Signs of recovery are beginning to show in the liquefied natural gas, offshore, and crude oil businesses the company operates. It's re-signing contracts to include provisions allowing for upside in the event energy prices rise, which is currently the case. Teekay is well positioned to return to profitability if crude oil prices can hold their multi-year highs. 

That means investors have to choose (in this matchup, anyway) between a company that has recently created tremendous gains for investors and one that could be poised for an epic recovery. It's a tough choice, so let's turn to several valuation metrics.  

Data source: Yahoo! Finance.

Comparing a shipping-container company and a shipping-vessel owner is not exactly an apples-to-apples effort, so some of the differences in valuation metrics, such as P/S and EV-to-EBITDA ratios, can be explained by their varying niches within the shipping industry.

That said, both stocks are about evenly priced relative to book value, although Textainer trades at a more attractive earnings valuation estimate. Teekay would need to greatly improve its business before it comes close to matching the shipping-container leader. Given the preceding estimates, it looks as if Wall Street thinks the business will only just return to profitability in 2018, meaning the real recovery may not occur until 2019.

That could all change depending on global energy prices, but that's a big bet most investors may not be willing to make.

Which is the better stock?

Despite the epic gains in the past year or so, Textainer appears to be the better stock to buy in this matchup. Its business steadily improved as 2017 progressed -- and that excludes most of the gains that should come from rising shipping-container lease rates in the years ahead. Simply put, there's significant potential for upside ahead. While that may also be true for Teekay, there's still too much uncertainty about the timing of the long-awaited recovery. Investors won't miss it by continuing to wait for more concrete signs of improvement in the quarters ahead.

That said, there is some irony here. What's good for Textainer's business -- rising shipping-container lease rates -- is bad for the business of its customers, especially when vessel owners aren't seeing a commensurate rise in their daily rates. That will have the effect of capping shipping-container rates to some extent. Shipping-vessel owners will attempt to pass the increase along to their own customers, but it goes to show that Textainer's long-term fortunes are still closely tied to the health of the industry it serves.

Nonetheless, Textainer remains the better stock compared with Teekay. For now, at least.